Annual Audit Manual
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7534 Evaluating disclosures, representations and communications
Oct-2012
In This Section
Accounting for and disclosure of identified related party relationships and transactions
Overview
This topic explains:
- How we evaluate the accounting for and disclosure of identified related party relationships and transactions;
- The required written representations to be obtained from management;
- What we need to communicate to those charged with governance;
- What we need to include in the audit documentation.
CAS Requirement
In forming an opinion on the financial statements in accordance with CAS 700, the auditor shall evaluate (CAS 550.25):
(a) Whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework; and
(b) Whether the effects of the related party relationships and transactions.
i) Prevent the financial statements from achieving fair presentation (for fair presentation frameworks); or
ii) Cause the financial statements to be misleading (for compliance frameworks).
CAS Guidance
CAS 450 requires the auditor to consider both the size and the nature of a misstatement, and the particular circumstances of its occurrence, when evaluating whether the misstatement is material. The significance of the transaction to the financial statement users may not depend solely on the recorded amount of the transaction but also on other specific relevant factors, such as the nature of the related party relationship (CAS 550.A46).
Evaluating the related party disclosures in the context of the disclosure requirements of the applicable financial reporting framework means considering whether the facts and circumstances of the entity’s related party relationships and transactions have been appropriately summarized and presented so that the disclosures are understandable. Disclosures of related party transactions may not be understandable if (CAS 550.A47):
(a) The business rationale and the effects of the transactions on the financial statements are unclear or misstated; or
(b) Key terms, conditions, or other important elements of the transactions necessary for understanding them are not appropriately disclosed.
CAS Requirement
Where the applicable financial reporting framework establishes related party requirements, the auditor shall obtain written representations from management and, where appropriate, those charged with governance that (CAS 550.26):
(a) They have disclosed to the auditor the identity of the entity’s related parties and all the related party relationships and transactions of which they are aware; and
(b) They have appropriately accounted for and disclosed such relationships and transactions in accordance with the requirements of the framework.
CAS Guidance
Circumstances in which it may be appropriate to obtain written representations from those charged with governance include (CAS 550.A48):
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When they have approved specific related party transactions that (a) materially affect the financial statements, or (b) involve management;
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When they have made specific oral representations to the auditor on details of certain related party transactions;
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When they have financial or other interests in the related parties or the related party transactions.
The auditor may also decide to obtain written representations regarding specific assertions that management may have made, such as a representation that specific related party transactions do not involve undisclosed side agreements (CAS 550.A49).
OAG Guidance
See OAG Audit 9050 for guidance on written representations.
CAS Requirement
Unless all of those charged with governance are involved in managing the entity, the auditor shall communicate with those charged with governance significant matters arising during the audit in connection with the entity’s related parties (CAS 550.27).
CAS Guidance
Communicating significant matters arising during the audit in connection with the entity’s related parties helps the auditor to establish a common understanding with those charged with governance of the nature and resolution of these matters. Examples of significant related party matters include (CAS 550.A50):
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Non-disclosure (whether intentional or not) by management to the auditor of related parties or significant related party transactions, which may alert those charged with governance to significant related party relationships and transactions of which they may not have been previously aware.
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The identification of significant related party transactions that have not been appropriately authorized and approved, which may give rise to suspected fraud.
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Disagreement with management regarding the accounting for and disclosure of significant related party transactions in accordance with the applicable financial reporting framework.
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Non-compliance with applicable law or regulations prohibiting or restricting specific types of related party transactions.
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Difficulties in identifying the party that ultimately controls the entity.
OAG Guidance
See OAG Audit 2200 for guidance on communications.
CAS Requirement
The auditor shall include in the audit documentation the names of the identified related parties and the nature of the related party relationships (CAS 550.28).
OAG Guidance
Audit work related to the identification and testing of related parties is evidenced through documentation in the audit file of the procedures performed and comments, as needed, on the results of the work.
Also consider if the identified risks, whether they are considered significant or not, as well as any difficulty in obtaining or any lack of evidence regarding related party transactions or any other matters, give rise to significant matters and thus need to be documented as such and subjected to engagement leader review. It would, for example, ordinarily be necessary to discuss with the engagement leader in advance the need to request confirmation of aspects of related party matters with a counterparty, as this might indicate a risk of fraud or at least a concern about a limitation of audit scope.
Related Guidance:
See OAG Audit 1143 for additional guidance on significant matters.